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Tuesday, November 27, 2012

Did Creative Destruction Destroy Hostess?

And If So is That Good or Bad?

One of the less
appealing features of the Romney campaign, a campaign that had a large
number of less appealing features was the argument that Mr. Romney’s buyout
firm was involved in the ‘Creative Destruction’ of some companies. The argument was that this was a good thing,
which it was for Mr. Romney’s company, not so much for the other investors,
creditors and workers of those companies.

Creative Destruction is the term that refers to the
process of a business or industry disappearing because its products and
services are no longer desired by the market place. Polaroid and Kodak are examples in the
imaging business, as the need for both instant cameras and film created images
was obliterated by the development of low cost digital imaging equipment.

The blame for what
appears to be the demise of Hostess Foods, makers of Twinkies and Ding
Dongs is being placed by many commentators on the refusal of the company’s
unions to accept massive cuts in wages and benefits. Other observers say the company’s management
is to blame. But one commentator, the
New Yorker’s James Surowiecki calls attention
to the fact that the company’s products had outlived their useful,
marketable lives.

The
company has been steadily losing money, and market share, for years. And its
core problem has not been excessively high compensation costs or pension contributions.
Its core problem has been that the market for its products changed, but it did
not. Twinkies and Ding Dongs obviously aren’t anyone’s idea of the perfect
twenty-first-century snack food. More important, the theoretical flagship of
Hostess’s product line, Wonder Bread, has gone from being a key part of the
archetypical American diet to a tired also-ran.

Because the brand
name still has appeal the expectation is that Hostess products will
continue to fill the supermarket and convenience store shelves, as investors
purchase the rights to the brands from the corpse of the parent company. But the lesson here really is to management,
and it is this.